VA loan: Definition, how it works, and eligibility (2024)

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• A VA loan is a type of mortgage for military families who meet certain criteria.
• You apply for a VA loan through a private lender, and it's guaranteed by the Department of Veterans Affairs.
• You typically don't need a minimum down payment to get a VA loan, but each lender has its own guidelines.

If you or your spouse has served in the US military, you may be eligible for a VA loan. This type of loan helps you buy a home with no minimum down payment. If your finances are in good shape, you can lock in a lower interest rate than what you'd pay on other types of mortgage loans.

What is a VA loan?

The US government created VA loans in 1944 to help soldiers returning from World War II buy a home. Today, a VA loan is still a type of mortgage for military members to purchase a primary residence, and it includes benefits such as low interest rates and no minimum down payment on a house.

VA loans are guaranteed by the US Department of Veterans Affairs. You won't apply directly through the VA — you'll apply through a private lender, just as you would with most other mortgages. The VA is in charge of compensating the lender should you fail to make mortgage payments. This makes giving a loan less risky for VA mortgage lenders, so they can offer mortgages with no down payment and better interest rates.

You aren't limited to getting just one VA loan in your lifetime. If you either a) sell your home and pay off the loan, or b) sell your home to another veteran who takes on the VA loan, you can get another VA loan.

If you completely pay off your mortgage and move later, you are limited to one more VA loan to buy another home, as long as the new home will be your primary residence.

Who is eligible for a VA loan?

You must be associated with the military to receive a VA loan, but there are a few restrictions. You may be eligible if you meet one of the following criteria:

• You're an active-duty member
• You're a wartime veteran who has served at least 90 days in active duty, OR a peacetime veteran who has served at least 180 days in active duty, OR a member of the National Guard or Reserves who has served for at least six years
• You're a spouse of a military member who died in active duty or in another military-related incident
• You're a spouse of a prisoner of war or military member who is missing in action

You don't necessarily need to have your Certificate of Eligibility in hand when you apply. The lender should be able to look up your COE electronically to check whether you've served enough time to qualify.

You also must meet a couple of criteria for your finances and property:

• Have the minimum credit score and debt-to-income ratio required by the private lender. Each lender sets its own requirements for credit scores and DTI, but many ask for at least a 660 score and 41% DTI.
• Your property must meet VA loan guidelines. It should be your primary residence and meet certain safety standards.

Types of VA loans

The VA guarantees several types of loans, including the following:

• VA purchase loan: This is what most people refer to when they say "VA loan." You receive a mortgage for your primary residence.
• Native American Direct Loan: This loan is for Native American military veterans. With a regular VA purchase loan, a lender gives you a mortgage that is backed by the VA. With a NADL, the VA is actually your lender.
• VA Rehab and Renovation Loan: You can either receive a loan that covers both your mortgage and home repairs, or apply for a separate loan to fix up your home after you've moved in.
• Adapted Housing Grant: If you have a service-related disability, you can receive money to either go toward buying a home, or repairing a home so it meets your needs. You don't have to repay the grant.
• Interest Rate Reduction Refinance Loan: The IRRRL is also known as a VA streamline refinance. If you already have a VA loan, you can refinance into another VA loan.
• VA cash-out refinance: With a cash-out refinance, you may refinance from a VA loan or conventional mortgage into a VA loan, and you can tap into your home equity by taking out cash.

The pros and cons of VA loans

Pros

• No down payment. A VA loan is one of the only types of mortgages that doesn't require a down payment. You would need at least 3% upfront for a conventional mortgage, and at least 3.5% for an FHA loan. (But keep in mind that if you do have some money for a down payment, you can get a lower mortgage rate.)
• No borrowing limit. Most types of mortgages limit how much you can borrow. There's no official rule about how much you can borrow for a VA loan; your mortgage lender will determine the amount based on your financial profile.
• No mortgage insurance. You don't have to pay for mortgage insurance when you have a VA loan. With a conventional mortgage, you have to pay private mortgage insurance (PMI) until you gain at least 20% equity in your home. FHA and USDA loans charge you a mortgage premium at closing, plus an annual mortgage premium.
• Low interest rates. VA loans and USDA loans typically come with the most affordable interest rates. Conventional mortgages have higher rates, and FHA loans often charge even more than conventional loans.

Cons

• Funding fee. Although you don't have to pay for mortgage insurance, you will pay a funding fee. You may choose to pay the full funding fee at closing or roll it into your mortgage. The fee ranges from 1.25% to 3.3% of your loan amount — it's typically on the lower side if you have a significant down payment.
• Property requirements. You're restricted to using a VA loan for your primary residence — no investment properties or vacation homes allowed. You also might not be approved if the home doesn't meet certain safety standards. For example, your roof must be in decent condition, and the home cannot have termites.

VA loan FAQs